Proceed with caution

The Government this week officially institutes the $9-an-hour minimum wage. While the business community has made its usual protests, these have been muted. The San Juan Business Association, while saying it was not opposed to the new wage warned that it may increase unemployment and inflation. The Trinidad and Tobago Manufacturers Association and the Supermarkets Association have made similar noises, saying they are not averse to the increase but that it must be tied to productivity.

Presumably, such tact on the part of business organisations serves two purposes: to avoid criticising the Government, and to avoid looking as though they want to take advantage of poor people. But there is only one real reason that the business community should not object to the $9 minimum wage, and that is if $9 an hour is not above the market wage. The political argument for a minimum wage is that, if the individual’s salary was decided by the market, his wage rate would be so low it would be immoral to work for it. However, to corrupt Winston Churchill’s comment about democracy, we can say this: The market is the worst system ever devised for allocating resources, except every other system.

The consensus among economists is that a minimum wage leads to higher unemployment rates. This is because the law of supply and demand means that, if the minimum wage is much higher than the market wage, then fewer workers will be hired at the higher wage than at the market wage. Moreover, the minimum wage often harms those with the lowest skills, since such persons are naturally the first to go when employers start laying off workers. Nor does the wage help the poorest sector, who typically don’t even have a job in which to earn a minimum wage. Additionally, a high minimum wage can also discourage on-the-job training, since a business now has to spend more to pay apprentices while they are learning. Such effects can be ameliorated by exempting certain groups, such as young people and part-timers, from the minimum wage. Generally speaking, however, a minimum wage, while it makes a government look good in the short-term, often has long-term effects which are politically damaging and which, more pertinently, harm the most vulnerable segments of the society.

It may therefore be ironic that the PNM administration is enforcing the minimum wage at a time when Prime Minister Patrick Manning is talking about zero unemployment. A further irony is that, if the minimum wage does lead to higher unemployment among young people, this may contribute to the rising crime rate, which is the area where the Government has been receiving the most criticism. We say “may” because it is possible that the $9-an-hour is in line with the market, in which case our dire speculations are moot. But we do not know what the market wage really is nor, we suspect, does anyone else. Because part of the problem with the way we run our country is that decisions are too often made without research. However, we back the advice proffered by Gail Merhair, spokesperson for the San Juan Business Association, who warned that the Government “should proceed with caution on this issue.”